US dollar remains on defensive

Asian currencies appear to be the new havens

Across the G-10 and commodity currency space overnight, multiple currencies traced out dangerous-looking potential reversal formations. The reason being today’s Georgia’s Senate elections, with markets reducing short US dollar positioning into today’s event. A Democrat clean sweep will almost certainly see a potentially abrupt reversal of the gains seen recently in currencies such as the Euro, British pound, and the Australian and New Zealand dollars, to name but a few.

USD/JPY narrowly avoided an outside reversal day overnight, that would have signalled dollar gains versus the yen. USD/JPY is hovering at 103.00 this morning, and further US dollar gains are being tempered by the Japan government’s decision on Thursday regarding Covid-19 states of emergency. If the government follows that course, USD/JPY will likely fall to near 102.00 on repatriation flows.

Asian currencies are bucking the trend, notably the Chinese yuan, with both the onshore and offshore variants rallying through 6.5000 versus the dollar overnight. The fall of USD/CNY and USD/CNH through 6.5000 appears to have sparked stop-loss selling and algorithmic traders adding to US dollar shorts. There may also be an element of haven buying in play, with the yuan finding favour as a hedge against US markets’ volatility. That will be an intriguing development for currency markets if proven correct.

The PBOC set a firm USD/CNY fixing at 6.4760 this morning, signalling that it remains comfortable with further CNY strength. I suspect that as long as CNY remains sensibly priced on a TWI basis from the PBOC’s perspective, they will continue to allow the US dollar to fall versus the yuan. USD/CNY is trading at 6.4500 this morning, off its session’s lows at 6.4300. Although some US dollar retracement can be expected ahead of the elections today in Georgia, the technical picture suggests that longer-term, USD/CNY will now target the 2028 lows around 6.2500.

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